Wednesday, June 04, 2014

Employing Proper Leverage in Life and Markets

I'd like to thank @NASTrading for including this blog in his list of Top 10 Websites for traders.  Nat makes a very good point in his post:  the importance of leveraging one's time and effort.  By focusing on reading the sites, research pieces, and information most relevant to you and your trading, you minimize distraction and increase the odds of synthesizing the useful material into promising views.  Nat's list is a great place to start for leveraging web surfing time.

There are other spheres of trading where leveraging efforts is important.  I recently met with a group of traders to discuss best and worst trading practices.  One topic that came up a few times relates to what I call "selectivity":  taking the best trades and avoiding marginal bets.  Many times traders ask about how they can avoid overtrading when they haven't clearly defined proper trading.  What impressed me about the traders I spoke with is that they had made ongoing efforts to review their trading and identify the "setups"--the patterns of price, volume, order flow, etc.--that constituted their best trades.  Once you define the parameters of good trades, you're in a much stronger position to leverage your resources and focus your attention on only the most promising situations.  

For example, because volume correlates so highly with market movement, I will not place daytrades unless volume hits a threshold level.  If the market is slow, it's apt to be noisy and limited in opportunity, so I stand aside.  Other traders might leverage their efforts with different criteria:  this is where stock screening can be useful.  Many of the best portfolio managers I speak with will only take a trade if they can clearly define a particular ratio of reward to risk.  That enables them to be patient in their entry execution until the risk/reward threshold is reached.

But the value of leverage goes even further in life:  

*  Doubling down on your time with the people who enrich your experience emotionally and intellectually and minimizing time with people who sap your energy or resent your success;

*  Maximizing quality time outside of markets to build your relationships, strengthen yourself physically, extend your learning, and rejuvenate yourself spiritually and minimizing low quality time that is not productive in any of these regards;

*  Focusing activity toward the most important personal and life goals and minimizing activity that keeps you busy but doesn't move you forward.

In life, as in markets, we can "overtrade".  We pursue marginal courses of action and thereby dilute our most promising efforts.  By knowing what moves us forward as people, we can leverage our best personal "setups" for success. 

Further Reading:  Overtrading and Unrealistic Expectations